According to MUFG, the UK rate market has tempered its expectations for multiple rate hikes from the Bank of England (BoE). With only 19 basis points of hikes priced in for next week's Monetary Policy Committee (MPC) meeting and 39bps by February 2023, the market is in a state of limbo regarding the BoE's forward guidance.

Key Points:

• 50:50 Odds for Additional Hike: Market sentiment is currently split on whether the BoE will go for one more rate hike after a near-certain 25bp hike next week.

• Dovish Remarks: Governor Bailey and Chief Economist Pill have indicated that the rate hike cycle is nearing its end, which has influenced the market to cut back on rate hike expectations.

• Forward Guidance is Key: The MPC’s updated forward guidance next week will be pivotal in determining if the BoE will pull the trigger on one last hike or pause its tightening cycle.

Trading Recommendations:

• Cautious Positioning: Given the reduced confidence in a string of BoE rate hikes, traders should be cautious when taking positions based on the BoE's interest rate moves.

• Look for Forward Guidance: Focus on the MPC’s updated forward guidance next week as it could significantly influence short-term and medium-term strategies.

Implications:

For Traders:

• Reduced Risk Exposure: Traders looking to speculate on GBP-related assets should consider reducing exposure given the prevailing uncertainty.

For Policymakers:

• Rate Hike Dilemma: Policymakers will have to weigh the costs and benefits of another rate hike against a backdrop of rising inflation and economic uncertainty.

Conclusion:

The BoE's recent dovish remarks have caused the UK rate market to pull back expectations for multiple rate hikes. The coming week's MPC meeting and its forward guidance will be instrumental in shaping market sentiment and could offer clues on whether the BoE is close to ending its current tightening cycle.